LONDON, March 4 (Reuters) - Greece’s benchmark 10-year government bond yields dropped to their lowest since 2006 on Monday after Moody’s raised its rating late last week, bolstering investor optimism towards the euro zone’s most indebted country.

The country’s debt agency was quick to pounce on this positive sentiment, announcing that it has appointed banks for a long-awaited 10-year bond sale, likely to be launched in the coming days.

Moody’s on Friday lifted Greece’s issuer ratings to B1 from B3, citing the effectiveness of the country’s reform programme.

Greece’s 10-year yield dropped to 3.60 percent in early trade on Monday, the lowest since January 2006, before pulling back to 3.67 percent after the 10-year bond deal announcement.

Yields often rise after a bond sale is announced as investors make room for the new supply but analysts say that some profit taking was also likely after the strong rally seen in February.

“There was some front running of this ratings upgrade, the two notch upgrade was a bit surprising,” said Michael Leister, rates strategist at Commerzbank. “It is a text book case of profit taking.”

A recently-issued five-year bond’s yield fell to its lowest in its short trading history at 2.735 percent.

“The move from Moody’s is reflection that the reforms are already bearing fruit in the shape of some fiscal improvement with the primary surplus,” said DZ Bank strategist Daniel Lenz.

“But I think what is also important is that Greece is showing it has access to markets.”

Although the Greek bond yield did rise off the 12-year low after the deal announcement, evidence of market access for Greece is considered positive, given the country’s massive debt-to-GDP ratio — 176 percent.

Italian government bond yields rose 1-3 bps across the curve, with one analyst saying investors were using BTP Futures as a hedging tool as they prepare to invest in the new Greek deal.

“The only real liquid market for hedging peripheral risk is the BTP Futures, so I think that is what is causing some weakness in Italy today,” UniCredit rates strategist Luca Cazzulani said.

Italian government bond yields also briefly rose after Italy’s Deputy Prime Minister said that the Italian government would not pass any budget correction with tax hikes but did not rule out other measures to fix 2019 finances.

Broader euro zone government bond yields edged lower, though still near recent two-week highs as signs grew of a possible U.S.-China trade deal. World equity markets rose on the possibility an agreement might be signed around a summit on March 27.

Germany’s 10-year yield, the benchmark for the euro zone, dropped 2.4 bps to 0.162 percent, down from a one-month high of 0.208 percent on Friday. (Reporting by Abhinav Ramnarayan Additional reporting by Virginia Furness Editing by Larry King, Ed Osmond and Peter Graff)